Floating Or Fixed: Which Home Loan Interest Rate Should You Pick?
The decision on home loan is one of those critical decisions that have a long-term impact on a homebuyer’s life. Once it is decided that a house will be bought instead of staying on rent, it is time to look out for finance. That is when the question of fixed or floating interest on home loan arises. A careful analysis has to be done, considering this can impact your long-term financial stability. It is important to understand the difference between the two, and opt for the one that suits your finances and vision in the long term.
What is Fixed-interest rate home loan
At the time of taking a home loan, the interest rate is fixed for the entire tenure of the loan. There are also variants available for periods of 2, 3 or 10 years. However, there are clauses which entitle the home loan provider to change the rate of interest under certain conditions. With fixed rate home loan, you can plan the finances well because of the fixed amount of repayments.
Fixed rates are priced higher than floating rates. If the difference is not much, depending on your preference and need, you can opt for floating or fixed rate.
A fixed rate home loan can be taken in the following situations:
*When you are comfortable with the amount of EMI (equated monthly installment) that is required to be paid over a period of time. The amount should not be exceeding 25-30 per cent of your monthly income.
*If you think that the rates may increase in the future, you can lock in the interest rate right away.
*When you are financially and mentally comfortable with a recently lowered rate of interest, you can opt for it and lock it. For instance, if the home loan interest had been 10 per cent and has now decreased to 8.5 per cent which is comfortable for you, you can lock it at that.
What is Floating-interest rate home loan
Moving in sync with the market interest rates, the floating rate home loan are linked to the lender’s benchmark rate which also makes it known as ‘adjustable home loan rate’. With the change in the benchmark rate, there is a proportionate change in the interest rate.
The interest rate on such loans is reset at regular intervals. The rate could be reset at the fourth month or the sixth of a financial year or the customer’s first disbursement date or at one’s loan anniversary. If there is any change in the market rate during the review period, the rates would also be reset. To account for the changed interest rates, the tenure of the loan gets re-adjusted. The loan tenure may be extended to account for the increase in interest rate. In order to avoid frequent changes to EMI which can impact one’s cash flow, the tenure of the loan is extended. But if one is comfortable with paying higher EMI, the loan tenure can remain the same.
A floating-rate home loan can be taken in the following situations:
*The interest rate applicable on your loan may fall as part of floating rate home loan, bringing down the cost of the loan.
*You can opt for floating rates if you are not so sure about interest rate movements and prefer to go with the market rates.
*Floating rates are cheaper than fixed rates, which makes it more convenient to save in the near term by saving on the cost of the loan.
When you are still unsure, you can opt for a combination of fixed and floating rates of home loan. If you have other loan repayments, in the initial three-five years, you can opt for fixed rate because of a fixed loan repayment amount that helps you to plan better. You can opt for a floating rate for the balance tenure.
Since it is difficult to predict future home loans, the switching option is available between fixed and floating rates which can be availed of at a nominal fee. Depending on the circumstances and financial calling, you can change the interest rate.
You should not worry too much about making a wrong decision with your home loan interest. Your financial profile, need, understanding of interest rate movements and preferences determine the interest rate chosen. There is, in fact, no one better interest rate.
Fixed or floating interest rate which is better?
|Go floating||Go fixed|
When you expect interest rates to fall
|When EMI payment is not a hassle|
|When not so sure about rate of interest movements||When you expect interest rates to rise|
|When you want savings on the interest cost in the near term||When you want to lock in at a lower interest rate|